Daybreak - Byju’s played the good game. It still didn’t matter

Episode Date: May 3, 2023

Last week, a full search and seizure operation was carried out by the Enforcement Directorate on three offices of edtech giant Byju's. The $22 billion startup is being investigated under the Foreign Exchange Management Act.The move comes at a terrible time for Byju's since it is already struggling with a long list of troubles including a potential debt crisis. The company still hasn't filed its financials for FY 2022.In this episode, not only do we look back at Byju’s missteps, we also go over what it did right, and how it still did not matter.Tune in.Recommended reading: The seven things you need to know about Byju’s FY21 financialsSubscribe to The Ken for more exclusive, deeply-reported, analytical business stories.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcast, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too? It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

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You must have heard the news. The offices of India's most valuable and most talked about startup by Jews were raided by the enforcement directorate last week. It was a full search and seizure operation. The $22 billion dollar ed tech giant that has brought more for an investment to India than any other startup so far is being investigated for money laundering. According to the central agency, Baiju's received 28,000 crore rupees

in the form of foreign direct investments over the last 12 years. And the company also remitted over 9,000 crore rupees to different foreign jurisdictions. The ED says that it also spent over 900 crore rupees just on advertising. And to make matters worse, Bayju's still has not filed its financial report for the year that ended in March 2022. Even the last financial report before that for the year 2021 came after a delay of many, many months, 18 months in fact, in September last year. And it did not paint a very pretty picture of the company. In its statement, the ED also accused the chief executive Baiju Ravindran of being evisive.

and not appearing for investigation in the last two years. Yes, Baiju's has been under the scanner for a while, but it is one of many. The ED has several investigations ongoing against different companies under the Foreign Exchange Management Act or FEMA. But what stands out is that compared to all the other startups caught in the ED's web, Baiju's profile is quite different. And this rate comes at a terrible time for Baiju's. They have been in the doghouse for the thousands of layoffs, the delayed financials and a demand

from its lenders to repay a part of its debt. It has also been trying to raise money to save itself from a potential debt crisis. So today, let us look back at what byju's did wrong, of course, but also what it did right and how it still did not matter. Welcome to Daybreak, a business podcast from the Ken. I'm your host, Nick Das Sharma, and I don't chase the new cycle. Instead, thrice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story that is worth understanding and worth your time. Today is Wednesday, the third of May.

Ideally, 2021 should have been a great year for byjuice. It was a year when the pandemic had brought about a newfound appreciation for online learning. The company raised over two billion dollars since the beginning of the pandemic. Its valuation rose from $8 billion to $22 billion. In the short period between 2020 and 2021, Bayju's users almost doubled from 64 million to 110 million. It was a year when Bayju's made a dizzy number of acquisitions, many of which were outside the country. So when its auditor Deloitte took a few months to long. to give byju's an approval for its financial year 2021 filings, many thought that it could be because of a lack of audit bandwidth. After all, the company had seen a five-time scale-up just

in terms of size. And that is exactly what a company spokesperson also told the Ken in June last year when we asked them about the delay in the filings. Unfortunately for byju's, that five-time scale and size also indicated the size of its losses. It was 15 times. And not just that, Deloitte auditors were not satisfied with what Bayju's was presenting to them as a fair picture of their accounts. The auditors gave an adverse opinion on Bayju's financial statements for 2021. This basically meant that they had sufficient evidence to conclude that Bayju's financial statements contained material misstatements and they did not represent its financial position fairly. In the same month, which is June of 2022, the Ken was the first report that Deloitte had held

off from approving Bayju's financial statements over its revenue recognition practices. When the results were finally released, they had shown that Bayju's lost over 12 crore rupees daily. It posted losses of over 4,500 crore rupees, the highest ever buy an Indian startup. But there was one particular thing that kind of raised many eyebrows. And it had to do with how it booked its revenue. Aet tech products, mainly tablets and memory cards, accounted for more than 80% of its revenue in this period. And as in the previous year, it recorded the entire sale value of these products when the customer bought them. But it took a different approach for the revenue that it got from streaming of

educational content. Whatever a learner was charged for for the content, it would be now booked through the period that they availed it for. For example, if the learner paid, say, 10,000 rupees for buy-jou's content for two years, it would be divided equally between the two years instead of being captured entirely in the first year's financials. Apart from that, in its report, Deloitte also pointed out problems related to the determination of financial guarantees given on behalf of customers. It also highlighted improper estimation of sales returns and expected credit loss, and also the absence of an accounting manual.

If you want to read a more detailed analysis about Bayju's last financial report, I highly recommend that you read this very incisive report by the Ken team called the seven things that you need to know about Bayju's FY2021 financials. You'll find the link to the story in the show notes of this episode. Also, in case you didn't know, the Ken is a subscription-based business news platform. but I'm going to give you free access to this story just for today. But hey, do buy a subscription to the Ken. We specialize in deeply reported analytical business news stories that you will not find anywhere else. And now back to the episode. You see, BayJews already has a long list of troubles including the ED now.

But the investigation comes at the worst time possible for the company. Its lenders want a prepayment of $200 million and a higher interest rate for restructuring its $1.2 billion term loan. Plus, there is all the bad press, the growth slump and of course the thousands of layoffs. Just last month, it raised $700 million in two separate deals of equity and convertible notes. This is really important for Bayju's to save itself from a potential debt crisis. So, unsurprisingly, Bayju's is doing everything it can to look good. Stay tuned to find out how it is trying to play the good game. What is the best way for a company to present itself in good light?

Charity, of course. So Bayju's has been doing just that. The company's philanthropic arm, Bayju's Education for All, donates hardware and software licenses to students who cannot afford Bayju's. You definitely know about it because not long ago, the company had roped in Lionel Messi as the brand ambassador for it. The initiative claims to have served 55 lakh students so far. Olina Banaji, a writer with the Ken, in the recent edition of a newsletter, pointed out how Bayju's has used this to make headway into different states in India. In both Andhra Pradesh and Maharashtra, the EdTech giant has signed memorandums of understandings with the governments to bring digital learning into government classrooms.

What is even more interesting is that in Andhra Pradesh, the government is spending nearly 700 crore rupees to buy over 5 lakh tablets preloaded with byju's content. The opposition in the state did not take this well. They alleged that Bayju's had won the bid almost unopposed. No global tender was put out for these tablets. But Bayju's knows that just relying on an only philanthropy strategy is not going to cut it. So when the questions began to be raised about the lack of regulation in EdTech, it decided to become one of the five founding members of the Indian EdTech Consortium. The IEC is a self-governed body that essentially wants to become one of the five founding members of the Indian EdTech Consortium.

The IEC is a self-governed body that essentially wants to deal with ed-tech consumer grievances in a transparent manner. It aims to set up a redressal system that actually works. But of course, the IAC is also a lobby for Indian ed tech, especially to keep the threat of over-regulation by the government away. And while Bayjou's may have expected that the government will take note of this and see how it is trying to be a good, responsible leader of the ed tech sector in India, it still did not save it from the enforcement direct rate. And let us not forget that in ED cases, the conviction rate is as low as 2%.

So there is a good chance that these rates will actually amount to nothing. But we also know that these kind of ED rates also work as a scare tactic. But the question to ponder here is why now? Especially because ED works directly under the Home Ministry of India. And according to the ED statement, these raids were carried out after receiving several complaints from private individuals. Who could they be? Daybreak is produced from the Newsroom of the Ken,

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